Bill Preston has signed a contract that will pay him $55,000 at the beginning of
ID: 2548396 • Letter: B
Question
Bill Preston has signed a contract that will pay him $55,000 at the beginning of each year for the next 7 years, plus an additional $110,000 at the end of year 7. If 12% is the appropriate discount rate, what is the present value of this contract? Bill Preston has signed a contract that will pay him $55,000 at the beginning of each year for the next 7 years, plus an additional $110,000 at the end of year 7. If 12% is the appropriate discount rate, what is the present value of this contract? Bill Preston has signed a contract that will pay him $55,000 at the beginning of each year for the next 7 years, plus an additional $110,000 at the end of year 7. If 12% is the appropriate discount rate, what is the present value of this contract?Explanation / Answer
Since the payment will be received at the beginning of each year for the next 7 years, First payment will be received at the beginning of Year 1 and second payment will be received at the beginning of Year 2, that is at the end of Year 1
So, Cash flows from Year 2 to Year 7 will be discounted as per the following table with PV Factor for year 1 being used for cash flow for year 2 and like wise all cash flows will be discounted
PV Factor
= 1 / (1 + r) ^ n
Where,
r = 12% or 0.12
n = 1 to 7
So, PV Factor for year 2
= 1 / (1.12^2)
= 1 / 1.2544
= 0.797193
Calculations A B C = A x B Year Payment time Payment PV Factor Present Value 0 Beginning of Year 1 55000 1.000000 55,000.00 1 Beginning of Year 2 55000 0.892857 49,107.14 2 Beginning of Year 3 55000 0.797194 43,845.66 3 Beginning of Year 4 55000 0.711780 39,147.91 4 Beginning of Year 5 55000 0.635518 34,953.49 5 Beginning of Year 6 55000 0.567427 31,208.48 6 Beginning of Year 7 55000 0.506631 27,864.71 7 End of Year 7 110000 0.452349 49,758.41 Present Value of contract 330,885.82Related Questions
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